Recent Delaware Decisions May Prove to be “Entirely Unfair” to Minority Shareholders in Parent Merger with Partially Owned Subsidiary

Wednesday, January 1st, 2003 at 12:00 am by Brian M. Resnick
Brian M. Resnick, Recent Delaware Decisions May Prove to be “Entirely Unfair” to Minority Shareholders in Parent Merger with Partially Owned Subsidiary, 2003 Colum. Bus. L. Rev. 253

Two Delaware cases that were decided in the summer of 2001 strip a target’s minority shareholders of the protections afforded them by an entire fairness review in the context of a parent company’s acquisition of a partially owned subsidiary through a tender offer followed by a back-end short-form merger. In In re Siliconix Inc. Shareholders Litigation, a class action lawsuit, Delaware Vice Chancellor John Noble held that a unilateral tender offer (whether a cash offer or a stock-for-stock exchange offer) by a parent for a subsidiary does not invoke the entire fairness doctrine, principally because the transaction does not involve a merger requiring any action from the target’s board of directors. In Glassman v. Unocal Exploration Corp., handed down a month later, the Delaware Supreme Court held that in a short-form merger pursuant to title 8, section 253 of the Delaware Code, the ‘parent corporation does not have to establish entire fairness, and, absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.‘ As a result of these two decisions, it appears that a parent company can freeze out the minority without ever having to satisfy an entire fairness review by first engaging in a tender offer, and subsequently executing a short-form merger.

For example, in Siliconix, Vishay Intertechnology, Inc. (‘Vishay‘), which owned 80.4 percent of Siliconix Inc., sought to freeze out the other 19.6 percent of shareholders by making a tender offer, which required at least 50 percent of the minority shareholders to tender, and then executing a short-form merger, thus freezing out those shareholders who declined to tender their shares. The court in Siliconix held that Vishay did not have to prove entire fairness of the tender offer. As a result of the Glassman court’s reading of section 253, Vishay would not have to prove entire fairness for the short-form merger either. Thus, the law does not require parent companies attempting such transactions to set up the procedural safeguards mandated by the entire fairness review. Consequently, minority shareholders can expect to be frozen out at a price at which at least 50 percent of the minority shareholders agree to tender, or at a price that satisfies the appraisal standard. They are not likely to receive the higher price that could be negotiated for them by an independent committee of board members, which is usually set up to negotiate on their behalf in parent-subsidiary mergers that require the entire fairness review.

Part II of this Note examines the common law and statutory background behind the entire fairness review in Delaware merger law, and the inadequacies of the appraisal remedy as a protective device for minority shareholders. Part III examines several recent Delaware decisions, particularly Siliconix and Glassman. Part IV examines the implications of these recent developments for future corporate behavior. Part V recommends that the courts overturn Siliconix, and recognize the two-part transaction (tender offer followed by a back-end short-form merger) as one overall acquisition, which should be subject to the entire fairness review.

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